 |
|
Discontinuities Where Did the Business Model Go?
In 1942 Joseph Schumpeter in his work entitled
“Capitalism, Socialism and Democracy” coined the phrase
“Creative Destruction” which is defined as a “process of industrial
mutation that incessantly revolutionizes the economic structure
from within, incessantly destroying the old one, incessantly
creating a new one.” Once again this concept is gaining
popularity and being quoted by economist as they try to explain
economic volatility. This resurrection is not due to a belief
that innovation or
creativity has increased but rather that the rate
of destruction has accelerated. |
|
Human nature
has always had difficulty
accepting obsolescence of what they
personally crafted with mind
and hands. |
|
|
|
Historically, creative destruction
involved marginal improvements
occurring over many decades. Armed with a time advantage,
businesses could adapt to the new methodologies. More importantly, the
elapsed time frame allowed generational adaptation, whereas the
originators of the obsolete technology where surpassed by the next
generation of new inventors. It is a known fact that change occurs more freely when the innovator was not the
originator of the first idea.
Human nature has always had difficulty
accepting obsolescence of what they personally crafted with mind and
hands. Contrarily, a family business heir can accept the need to change
grandfathers business, as they view the "old practices" as being
outdated.
However, today changes are occur
ring rapidly; sand castles built in the morning are being washed away by the
afternoons’ tide. Such expediency requires the originator to recognize
and respond to creative destruction prior to a comfortable mental
release of the old methodologies. Especially hard hit are the small to
medium businesses (SME’s) with the founders nearing retirement. At
an awkward point in their business life they
are learning that their company asset (and once perceived safe nest egg)
is yesterday’s business model and losing value daily. Unfortunately many
business owners do not recognize or more accurately refuse to accept
this inherent threat until it is too late.
False Beliefs and Perceptions
David Neeleman, the CEO and founder
of JetBlue recognized the advantage of change. “There are two axioms in
business. One says that when you figure out what makes you successful,
take the cookie cutter approach; Don’t change a thing and be the best at
that. The other says that you have to continue evolving in order to take
advantage of new opportunities. I choose the latter. I don’t want to be
a prisoner of our business model.”
To read the rest of the
article visit
http://www.lwandassoc.com/whatsnew.htm
Next Issue: First Telltale Signs of
Creative Destruction
newsletter sign-up
__________________________________________________________________
THE
DIFFICULTIES OF RAISING CAPITAL IN MAINLAND CHINA
In
the United States, the liquidity of our markets promotes
entrepreneurship, innovation and corporate growth. Most entrepreneurs,
steadfast in their efforts, can usually access the financing they need.
However, in other countries accessing capital can be a long and arduous
process with limited options. I gained a greater appreciation for the
structure of our banking system and the liquidity of our markets, when I
interviewed Mr. Goa the founder of Han's Laser Technology, located in
Shenzhen City in the People’s Republic of China. The company was founded
in 1996 and has since has grown to $90 million in revenues, employing
over 1500 people.
Funding Options for Entrepreneurs
In China, the availability of capital for entrepreneurs
is scarce and often the seed money comes through personal relationships.
In the case of Hans Laser, the $50,000 start-up capital came from a
customer deposit; provided through a long-term relationship that Mr. Goa
had formed while working in Hong Kong. According to Jones Day, an
international law firm specializing in foreign business transactions,
companies are often funded by
personal loans obtained through the principles. This is an important
point to consider when doing business in China. Due diligence to uncover
such financing agreements is crucial, as these transactions are often
not documented and can only be discovered through exhaustive
investigation. Even with the best efforts, there is still an inherent
risk.
Financing the Next Stage of Growth
Obtaining growth capital in China is very complicated.
Investments are controlled by state owned enterprises, which according
to state capital regulation the investing enterprise must maintain a
controlling interest in the company. Valuations are void of intangibles,
due to the governments desire to avoid what they term as “suspicious
trading”. The elimination of intangibles would be fatal to many
companies in the United States, where high valuations are founded on
intellectual property.
By 1998, Han’s Laser had grown to $1.5 million in
revenue, $400,000 in net profit, with approximately 20 employees. Mr. Goa realized that he could not reach the next stage of growth without a
large infusion of capital. He secured the first venture capital funding
in 1999 through a state-owned company. Based on a valuation of $1million
in net assets, void of intangibles, the investment of $510,000 provided
the investor with a 51% majority ownership and Mr. Goa’s assets where
valued at $490,000.
Once obtained, the funding provided the company the
needed stimulus and it quickly grew to $10 million in sales with total
asserts valued at $2.5 million. The terms set forth in the agreement
were aggressive by US standards but Mr. Goa was desperate for money and
agreed to the conditions. He did however, set forth a provision to buy
back 2% of the equity if the overall assets reached $2.5 million. Once
the agreement was signed, it took nine months to secure the funding. If
forced to wait for almost a year, many US companies either would have
been out of business or would have lost their competitive advantage.
In spite of the growing success, the company faced serious internal
problems. The investor’s relatives were using the company as a means to
promote their individual wealth; embezzlement became rampant. Mr. Goa’s
complaints to the investors were unheeded. Left with no alternative, he
decided to try to buy back his shares. After much discussion, it was
decided that he could purchase the 46% for $2.2 million, with a required
$1.1 million
deposit. To continue reading this
article
visit http://lwandassoc.com/articles.htm
|
.jpg){kind=logo}
